How to Invest in Real Estate Notes – Part 1

Investing in a safe place that also provides you with a good return on investment has been a challenge since the origin of markets. From high employment and dropping housing prices, to unsustainable debts at the federal and state levels, to several foreign wars and emboldened Asian powers, the U.S. has a deeper set of economic issues than at any time in our recent history.

The housing market has been absolutely crushed over the past four years, and commercial properties are also struggling. Some very smart and well known investors are saying that now is a great time to buy either a primary residence or a secondary home. Personally, I don’t agree with them, as the underlying demographics and economy picture are scary.

However, an investment opportunity of which many are unaware is the buying of real estate notes. Even most realtors and mortgage brokers have either never heard of real estate notes or know little about them. That is because real estate notes, also known as mortgage notes and deed of trust notes, make up only a small slice of the overall real estate market.

A mortgage note is created when one individual or business sells a specified property to a buyer. The two parties agree to the sales price, down payment, terms, etc. and then create a note to show how the buyer will make payments to the seller. The seller is considered to be “carrying the note” and may either sell the note to a mortgage note buyer or keep it.

Becoming a mortgage note buyer and persuading note holders to sell you their note is not something that you should quickly jump in to. After all, every mortgage note carries some risks, and the smart mortgage buyer is constantly thinking potential issues and worst-case scenarios. The most obvious risk is that a property buyer defaults on the note and the mortgage buyer is forced to foreclose. However, other elements like the condition of the property, having legally valid documents, the payer’s credit, etc. can all influence the probability of a default and the chances of the mortgage buyer recovering their investment in that scenario.

The above description has acquainted you with the basics of real estate notes. In Part 2, we will dig into more of the details of mortgage buyers and what to do when someone is willing to sell their real estate note.

3 thoughts on “How to Invest in Real Estate Notes – Part 1”

Enjoyed your blog Alan. Have also reached most of the same conclusions. One of the guys I have subscribed to past couple years (Porter Stansbury) is so concerned about our debt problems he’s recommending investing offshore to large extent. He’s talking about scary scenarios previously inconceivable i.e. the U.S. has acted so irresponsibly in its borrowing that the dollar is serious jeapordy of losing its position as the world’s reserve currency. Keep up the interesting articles and, Go Mariners!